China Banking's Great Wall

May 22, 2003

It was the deal that would change Chinese banking forever. When U.S.-based Newbridge Capital Inc. agreed last October to buy a controlling interest in Shenzhen Development Bank Co. (SDB), Chinese officials were so enthusiastic that they even allowed Newbridge to install its own management team before final details had been ironed out. At last, Chinese regulators and bankers seemed ready to allow a real commercial bank to flourish under foreign control.

Newbridge's managers came, but the deal never closed. And now the entire transaction appears to have blown up into a fight between U.S., Taiwanese, and Chinese interests. On May 12, officials at SDB dissolved the Newbridge-run management board at the bank. Two days later, Newbridge filed suit in a Texas court against one of Taiwan's leading banks, Chinatrust Commercial Bank Ltd., charging that it improperly plotted to gain control of SDB itself, thus undermining Newbridge's exclusive agreement with the Chinese bank.

An amended complaint, filed on May 20, charges that the Shenzhen bank's president, Zhou Lin Fu, "conspired" with Chinatrust management to undercut the deal. SDB, however, is not a defendant in the suit. Despite repeated phone calls and faxes seeking comment, officials at Chinatrust and SDB had no comment on the lawsuit or on the allegations. Newbridge said it would have no comment either.

TRICKY BUSINESS. Newbridge Capital has been aggressively seeking opportunities in Asia since the 1997-98 financial crisis, and it counts some seasoned investors in its ranks. One principal is Texas Pacific Group, run by legendary buyout artist David Bonderman -- the dealmaker best known for reviving Continental Airlines Inc. (CAL). The other major investor in Newbridge is Blum Capital Partners, a San Francisco boutique run by Richard C. Blum, the husband of U.S. Senator Dianne Feinstein (D-Calif.).

How could these pros find themselves in this fix? Even for the savviest players, acquiring control of financial assets in China is tricky. China's recent leadership shakeup may have played a part. When Zhu Rongji, China's former Premier and a key backer of the deal, retired in March, Newbridge lost a key backer. The replacement of top officials at China's central bank and securities agency added to the uncertainty.

Newbridge also finds itself squaring off against the Koo family, the powerful clan that runs Chinatrust. The Koos have long made it clear they wanted a deal with a mainland bank. In February, Newbridge wrote a strongly worded letter to Chinatrust Chairman Jeffrey L.S. Koo and Jeffrey J.L. Koo Jr., Koo's son and the bank's president.

NEW LOW. In the letter, which was filed with the court papers, Newbridge Managing Partner Daniel A. Carroll said the Koos had contacted a representative of Shenzhen shareholders with a potential buyout offer -- in violation of Newbridge's arrangement to remain the exclusive outside investor (Newbridge had agreed to buy roughly 20% of SDB, a stake worth about $170 million). If Chinatrust didn't back off, Newbridge threatened legal action.

The dispute reached a new low on May 12, when SDB suddenly announced it was pulling the plug on the deal. Newbridge issued a statement saying: "We expect the Shenzhen government...to honor its obligations under this binding international contract with us." The only thing lacking was a signature, Newbridge said. The U.S. group also claimed that the deal was approved last August and September by the People's Bank of China and by the China Securities Regulatory Commission.

The next day, at a meeting of all the parties in Shenzhen, a negotiator for SDB told the group that the decision to dissolve the management committee was a "commercial" decision by the bank, rather than a government decision. The official also said that talks on Newbridge's deal would continue.

"NUT CASE." But Newbridge had waited long enough, and filed its suit. It's rare for even the most frustrated foreign investors in China to turn to the courts, for fear of jeopardizing future relationships. But Newbridge isn't a normal investor. The Chinese "didn't realize they were dealing with a nut case" -- that is, a firm that wouldn't play by routine rules, says a knowledgeable source.

If its claim is upheld, Newbridge may have some recourse, since Chinatrust has a U.S. subsidiary. Doing business in China is not for the fainthearted. By Mark L. Clifford in Hong Kong